In an effort to give more certainty in taxation to investors, the finance ministry has decided to change the way it implements amendments in law proposed every year as part of the annual budget.
The idea is to include as much of the finer details of every proposed change in taxation in the substantive law itself, rather than leaving them to be prescribed in the rules to be issued later. The move is set to cut down executive discretion drastically.
The move, which pertains to direct taxes—both personal income and corporate—is significant considering the two other changes simultaneously happening on tax policy and administration that also will add to certainty in taxation.
Firstly, corporate tax rate is gradually being lowered to 25% from 30% while tax breaks are being phased out under a plan meant to make the tax rate globally competitive. This exercise, announced by finance minister Arun Jaitley in 2015, is set to reduce the need for frequent changes in rates through annual budgets, once completed. Corporate tax rate for businesses with annual revenue of less than Rs50 crore was cut to 25%, from earlier 30%, in 2017-18 budget.
Secondly, the entire decision making on indirect taxation has now shifted to the federal tax body, the Goods and Services Tax (GST) Council, chaired by Jaitley and consisting of ministers from states and Union territories with own legislature.
“There is nothing much to be decided in annual Union budgets on indirect taxation from 2018-19,” a finance ministry official said on condition that he should not be named.
The combined effect of all these is set to reduce the tax policy risk that businesses have to take at the time of making investment decisions.
A second official, who also spoke on condition of anonymity, said, “We leave issues to be decided in rules when full clarity on certain aspects of the proposed changes is absent at the time of proposing amendments in law. If we have clarity, we can make finer aspects part of the bill that is to be passed by Parliament.”
The effort is to reduce the number of rules issued every year dealing with substantive law. “For procedural matters including modifying forms and returns to accommodate new technology, we will have to keep issuing fresh rules. Those anyway do not affect taxpayer sentiments,” said the second official quoted above.
Experts welcomed the move. “Making tax laws as comprehensive as possible will help in improving certainty and understanding of the policy,” said Rahul Garg, partner and leader, PwC India.
This is a fundamental shift not just in tax policy, but in the functioning of the bureaucracy itself. The thinking at the time of framing the Companies Act 2013, which has 470 provisions, was to keep the law simple and short while leaving operational aspects to rules, which would give officers the freedom to change these without having to approach Parliament. The Companies Act of 1956, which the 2013 law replaced, had as many as 658 provisions.